Icahn Bids for Dynegy, After an Offer From Blackstone Is Rejected

By MICHAEL J. DE LA MERCED

Published: December 16, 2010

Last month, the billionaire investor Carl C. Icahn complained that the price in Dynegy's deal to sell itself to the Blackstone Group, about $604.5 million, was far too low. In urging shareholders to reject the bid, he argued that others would be willing to pay more than Blackstone's final offer of $5 a share.

Mr. Icahn succeeded in killing the Blackstone deal, and on Wednesday, he proved that the company could strike a higher-priced deal - by making his own bid.

Dynegy said that it had agreed to sell itself to Mr. Icahn's investment firm, Icahn Enterprises, for about $665 million, or $5.50 a share, in cash. That represents a 10 percent premium to Blackstone's final offer and is 10 percent higher than Dynegy's average closing share price over the last 30 trading days.

The question now is, What are Mr. Icahn's plans for the power company?

Several analysts wrote in research reports on Wednesday that the deal with Mr. Icahn more closely approached their own valuations of Dynegy, and that Blackstone's offer was too low, even at $5 a share.

''We believe Icahn's offer represents reasonable value for the company, and see downside should fundamental value become relevant once more,'' Julien Dumoulin-Smith, a UBS research analyst, wrote in a note.

Yet the Blackstone offer did provide Dynegy one advantage. Much of the impetus behind that deal was its effort to relieve Dynegy's roughly $4 billion debt load, which the buyout firm would have shouldered. Dynegy expects to become cash-flow negative next year, partly because of low natural gas prices. And the company could run afoul of indebtedness limits attached to its term loan facility in 2011, according to KDP Investment Advisors, a debt research firm.

Announced concurrently with the Blackstone bid was a proposal to sell four power plants to NRG Energy for $1.36 billion, a side deal aimed at easing Dynegy's debt burden. But no such transaction was announced on Wednesday. Last month, Dynegy warned that if the Blackstone deal were voted down, NRG would most likely pay even less for the plants.

One possible plan by Mr. Icahn is to flush out a higher bidder. Statements from both the investor and from Dynegy's management highlighted the ''go-shop'' period allowed under Wednesday's deal: The company will have until Jan. 24 to seek better offers.

While Dynegy's previous agreement with Blackstone also had a go-shop period, Mr. Icahn complained that certain conditions, like matching rights for the buyout firm and a high break-up fee, had stifled the process.

In a statement, Bruce A. Williamson, Dynegy's chairman and chief executive, specifically mentioned the company's ''continued ability to solicit superior proposals'' and the commitment of Icahn Enterprises to support ''a company-accepted all-cash offer for 100 percent of the company.''

Mr. Icahn himself added: ''All stockholders should benefit from the auction process, which has now begun at a price which is 10 percent higher than the last bid.''

The activist investor also said in Wednesday's announcement that he was willing to support an all-cash deal that Dynegy deemed superior. He currently owns about 10 percent of the company's shares and holds options for another 5 percent.

It is also possible that Mr. Icahn could seek to dismantle Dynegy by selling off parts. He has argued that the NRG offer also undervalued the Dynegy power plants.

It is unclear how Dynegy's other major shareholder, the investment firm Seneca Capital, will respond to Mr. Icahn's offer. Seneca was just as vitriolic in its campaign against the Blackstone offer, proposing two dissident candidates to Dynegy's board as a sign of its discontent.

Seneca has not indicated whether it has dropped those plans, and a spokeswoman for the firm had no immediate comment.

This is a more complete version of the story than the one that appeared in print.